Worker Misclassification Crackdown and Payroll Taxes

The Labor Department is getting aggressive about worker misclassification, issuing a tougher interpretation of the classification rules for workers under the Fair Labor Standards Act. The new guidance, says contractors can be treated as employees if their work is integral to the firm’s business, even if done off-premises. Workers who supply their own tools won’t necessarily be classified as contractors. A permanent or indefinite working relationship suggests workers are employees. And those who perform work for more than one firm aren’t necessarily contractors.

Employers are likely to challenge the new rules in court. But for now, the Labor Department will use them as it continues its crackdown on misclassification. The rules don’t change the income tax standards for worker classification. The Labor Department will continue sharing misclassification referrals with the IRS. If the Labor Department tells the IRS that a firm’s workers are employees for labor law purposes, the company will face an uphill battle convincing the IRS otherwise for tax purposes. Where do your contractors/employees fit in?Kiplinger Tax Letter, August 2015